Licensing and your options: changes to limited MDA requirements

Advisers using limited managed discretionary accounts (LMDAs) with their clients will need to fulfil new licensing requirements from 1 October 2018.

While some may already be in the process of acquiring the updated licence or already have one, others may need to consider their options to continue to offer the service to their clients.

BT spoke to Claire Wivell-Plater, The Fold Legal Pty Limited, about the changes and what advisers might need to do. [Watch the webinar]

Using an LMDA with clients

MDAs can be attractive to clients looking for transparency, ownership and flexibility in investments, but with the continued option of having someone else manage investments on their behalf. In complete form, it involves four components: advice to the client, ongoing investment management on their behalf, administration and reporting and custody of their investments held by the adviser.

Ms Wivell-Plater says, “in the case of an LMDA, the administration, reporting and custody of the investments is held by a third party, generally a platform, while the adviser continues to offer the investment management and advice components.”

Advisers have been able to offer LMDAs to their clients under existing licences, but from 1 October 2018, will be required to hold licensing specific to the service. Those without licences will be unable to operate on their existing discretionary basis and will be required to get client approval for each change required to the client’s investment portfolio.

The new licensing requirements

To continue to offer LMDAs, you will need to be licensed to provide:

personal financial advice relating to MDA services.

deal by applying for and issuing, varying or disposing of a financial product.

general financial advice relating to all financial products in which the MDA invests.

apply for the issue, variation or disposal of a financial product on behalf of another (that is, your client).

“You’ll need to apply for a variation to your licence if you are already licensed, or if you are an authorised representative, then your licensee will need to do this,” says Ms Wivell-Plater.

You can apply for a licence through ASIC. The online application includes a business description, table of organisational competence, personal statements, two business references and a financial assurance. The last can either be a pro forma of your profit and losses or a certificate from an accountant. The application is then assigned to an ASIC analyst and the assessment process can take 9-12 months to complete.

“Given timing, it’s probably too late to comply with the October deadline if you apply now so it’s worth considering your other options,” says Ms Wivell-Plater.

Other options for continuing to offer LMDAs to clients

Advisers caught in the situation of being unable to make the licensing changes in time for the 1 October 2018 deadline – or finding that the variation wouldn’t be suitable for their business model – could consider these three alternatives.

Becoming an authorised representative of a licensee
“This generally involves paying a fee to the licensee and operating under their licence. The licensee will monitor and supervise your activity,” Ms Wivell-Plater says.
Whether this is a suitable option for you may depend on your preferred pattern of working and investment approach with your clients.

Using separately managed accounts (SMAs) instead
While similar in some ways to MDA arrangements, these are individual accounts held within registered managed investment schemes instead. They operate under complete product disclosure statements and may be an option to allow clients continued transparency over their investments.
Advisers using BT Panorama could consider either of their two SMA solution sets.
- Professional IMs: an “off the shelf” solution with more than 50 different portfolios.
- Licensee portfolios: exclusively tailored for your clients, with your practice, dealer group or an external investment manager creating and managing the investment models.
3. Using an external MDA provider
In this scenario, you continue to provide advice to your clients but the external provider holds the licence to manage the portfolio and investments and act in a discretionary capacity.
Advisers using BT Panorama could consider the third party MDA solution available on the platform, allowing them to use an external MDA provider and the Panorama tools to build and manage clients’ model portfolios.

With only a short time before licensing requirements become active, it will be valuable for advisers to consider their options before the deadline to allow enough time to both evaluate and implement suitable solutions for their clients under the new regime.

James Williamson, Millhaven Financial Services, shares his experiences of using managed accounts for his clients' investment portfolios.

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